#11
TITLE: GOVERNMENT PRESS BRIEFING [with German Gref]
[RUSSIAN FEDERATION GOVERNMENT HOUSE, 16:10, MARCH 29, 2002]
SOURCE: FEDERAL NEWS SERVICE (http://www.fednews.ru/)
Moderator: Good afternoon, ladies and gentlemen. We are in the press center of the House of Government and our guest today is the Minister for Economic Development and Trade Mr. German Gref who will tell you about the results of the discussion by the government of the social and economic conditions of the development of the country for the year 2003 and up to the year 2005. He will also tell you about the discussion around the draft law on the foundations of technical regulation. You have the floor.
Gref: Thank you very much. Today we discussed two very important topics. One is according to schedule, under the law on forecasting. It is supposed to be discussed in the first quarter of every year. It is the scenario-based conditions for the functioning of the economy and the report on the development of the economy for the previous year. Today we examined both these issues and the government supported the scenario development block proposed by the Economic Development Ministry. It is the scenario-based conditions for economic development for medium term. I will remind you the technology. The scenario conditions are the first document with which the budget process begins. Based on scenario conditions we draft a forecast and based on the forecast we draft the budget.
In this way one can consider that within the deadlines established by the government the first document today was examined and approved by the government. This document, unlike those of previous years, was somewhat changed. The document was seriously broadened and the analysis presented at the government meeting was probably more profound and large-scale by one order of magnitude as compared to the traditional approach.
This was done for a number of reasons, in virtue of the fact that the budget message of the president, the annual message of the President formulated the task for the government to intensify the medium-term planning and forecasting, the budget planning and forecasting of the economy.
Secondly, we come to the conclusion about the need for medium-term, financial planning and also economic planning so that we could see how the economy would develop over several years, how particular decisions to be taken in the current year would affect the medium-term perspective.
Thirdly, in this current year there was a clear demonstration of the dependence of the Russian economy on foreign economic conditions and that is why there were serious changes introduced into the section concerning the so-called external factors which analyzes the status of the world economy and forecasts a particular scenario of the development of events and how this will affect the situation inside Russia. We tried to gain a possibly fuller understanding of the factors that determine the development of the world economic centers, which include Europe, the United States, Japan and we have forecast the world situation. A lot of documents was examined, pertaining to the consensus forecasts of the world economy, of the development of different sectors of world economy. We also tried to forecast the price situation as regards the foreign economic situation.
We did that with regard to the Russian products and services. Today we submitted to the government the scenario conditions in two variants which differ mainly in the external conditions which in turn largely determine the development of internal conditions of the economy. In the first place this is true of the favorable and not quite favorable conditions for the prices of Russian products, the fuel and energy products and other mostly raw material sectors which determine the position of Russian export.
In the first variant we assumed the price for oil to be 18.5 dollars per barrel and in the second variant we took the average price of 21.5 dollars per barrel. We also (with regard to fuel and energy products) examined the subvariant of variant 1, variant A, when the price, the contract price of Russian oil equals 16 dollars per barrel. We also forecast a model for the foreign economic situation and the structural shift with regard to the main products of Russian export and so we tried with maximum accuracy to project their influence on domestic situation. Based on the domestic situation we established and forecast and simulated such factors as the correlation or rather the rate of inflation, the relationship between the growth of unemployment or the fall in unemployment by the years, then the GDP growth figures. I think it would be interesting for you to know this that in the first scenario too we assume that the GDP growth will amount to an average of 3.5 percent depending on the situation and in the second variant it is up to 4.1 percent. In the medium-term perspective, meaning up to the year 2005, we assume that after the current structural change the GDP growth will reach 5-5.5 percent on average during the year.
Among the important factors we must mention the growth of consumption, the growth of people's incomes and the growth of labor remuneration. The forecast an average increase in people's incomes at the rate of about 6 percent a year. It was said that the labor remuneration in this country in the medium-term will continue to grow with the labor productivity and strictly speaking all that pertains to wages -- we assume that in the medium term the pace will grow at 6-10 percent a year.
I will probably enumerate all the factors. Maybe you will ask questions because I may talk for a long time? In principle, we also tried to subject to a detailed analysis the trend of the last two months of this year. Today we can assess the situation of the first two months of this year as positive, especially I have in mind the trend that appeared in February. In February the GDP growth was 0.3 percent, the industrial growth was 0.8 percent over the previous month.
As to over the appropriate period last year, we believe that in the first quarter of this year the growth will reach 3.1 percent of the GDP. Already now it is obvious that the rate of lowering of inflation if we take the average quarterly, we forecast the rate of inflation at the level of 1.8 percent a month. In March, based on data we have today, we believe that the rate of inflation will be at the level of 0.9 -- 1 percent. This downward trend allows us to say that we will most likely be able to keep inflation within the projected limits and there are no serious reasons why we can't.
We also forecast that inflation will go down in a medium-term perspective and stand at about 10-12 percent in 2003 and 8-10 percent in the subsequent years. We also forecast capital flight in absolute figures. As you know, last year was the first year when we saw a relative decrease in capital flight, by relative I mean as a percentage of the balance of payments, the balance of trade.
During the first two months, as the initial data show, capital flight decreased for the first time in absolute figures too, which represents a positive trend for economic development.
Let me stop here because there is too much information and huge work has been done. This work was done during the last three months. A month ago it was considered by the board of the Ministry of Economic Development and Trade. The work was done jointly by the Economic Development Ministry, the Finance Ministry, the Bank of Russia, the Labor Ministry, and the State Statistics Committee. That's all as far as the first point is concerned.
The second important question that was discussed today concerned the approval of the law on technical regulation, on the basic principles of certification and standardization, and conformity verification. We believe this is the most important law for three reasons. First, this is an important law aimed at debureaucratizing the Russian economy. Second, this law encourages economic growth, tighter control and better quality of products that enter the market. Third, this is a law Russia needs to adopt in order to become a full member of the World Trade Organization.
The law calls for cardinal changes in this sphere. We believe that the existing system of technical regulation and standardization is obsolete and does not match the realities of modern industrial potential development. In fact, it slows down the development of industry. Today this is a sphere where the omnipotence of bureaucrats and agencies has turned into a serious brake on the development of key economic sectors.
There are 60,000 mandatory standards in Russia. Of them, 24,000 are at the state level, and 37,000 are departmental standards. Ninety percent of products traded on the Russian market are subject to standardization and certification. No other country in the world has such a level of mandatory technical regulation. We can say that more than 80 percent of existing standards and mandatory rules of technical regulations are not observed by manufacturers. Because of this, the economy still exists and develops. If all enterprises were made comply with all existing standards, the biggest part of Russian industry would have to stop operation because this would require it to make uncompetitive goods of bad quality which consumers would not want to buy, and, second, in order to bring these goods in line with existing norms and standards, a huge amount of ineffective investment would be needed. Ineffective because no one really needs this, primarily consumers.
What do we propose? We propose to introduce a new modern system of standardization, certification and conformity. First of all, it is necessary to give the status of law to mandatory technical regulations so that not only manufacturers but also consumers could contribute to the adoption of appropriate mandatory requirements to products.
Second, we propose to introduce rules of voluntary certification and conformity. Third, we propose to tighten control over the manufacture of low-quality, substandard and hazardous products, including by using administrative, criminal and material sanctions, such as mandatory withdrawal of products from the market at the expense of the manufacturer.
Why has the bill caused so much dispute? First of all, it strips departments and agencies of the right to introduce departmental normative acts binding on manufacturers. We believe this is a key novelty of the law and think that this will eliminate many unnecessary and non-mandatory requirements that impede the development of industry. The government approved that concept today and it approved approaches stated in the bill, and gave us another month to get this bill approved by 20 ministries.
I must say we spent the last eight months trying to get it approved by all concerned ministries. During this time, the bill was changed dramatically. But the most important thing is that its key idea and key norms set forth in its concept were confirmed at the government meeting today, and this means that this bill will be approved by the government and submitted to the State Duma.
To give you an example of existing rules and requirements, there were heated debates at the government meeting today over building norms and rules. For example, according to these norms and rules, only cauldrons that have peepholes can be used in Russia. But the world stopped making such cauldrons 10 years ago. If we observed these norms and rules, the country would not have a single modern cauldron provided with automatic controls.
Such "masterpieces" of departmental law-making abound. We think that the law and technical regulations should include only requirements that are mandatory for end products, requirements that contain safety norms for people and the environment. The rest of the norms and rules concerning the procedure for determining the correspondence of testing and certification must be made the subject of a separate government decision, not lower than that level.
Strictly speaking, this is the main idea of the draft law. One can say a lot here and may be I will try to briefly answer your questions.
Q: Russky Fokus. Concerning your forecast. In his introductory statement Mikhail Mikhailovich spoke about the new model of forecasting and implied that, based on domestic demand, the figure will be more. Could you explain what the thing is about? It is not quite clear as to whether now we are counting things differently or we simply accommodate the factors of a bigger domestic demand? This is by way of setting the record straight.
Secondly, a little about the tariffs policy with regard to natural monopolies. The plan is to examine in May the costs policy and so it will turn out that the short-term forecast does not take into account the tariffs policy, does it? So, how is this correlated? Thank you.
Gref: I will specify it so that it be clear. It is not a forecast -- it is scenario assumptions, the forecast is the next stage.
Q: But we shall be restoring the budget...
Gref: I repeat that I specifically said that the budget process has its three stages and there is the stage of the drafting of the budget by the government. The first is the scenario conditions, the second is the forecast and the third is the budget. The basis of the budget is the forecast.
Now with regard to the model with which we calculate the forecast or the scenario conditions. Firstly, I must specify the following. In his statement the premier spoke not about the model for counting, he spoke about what has changed, a model of the internal sources of economic growth, if you wish. While previously the determining factors of economic growth were external factors and the devaluation of the ruble which, strictly speaking, turned these external factors into the main ones, while today those external factors have been replaced by the internal ones. This was analyzed in the report in detail. About 30-odd percent is the final demand, the demand of the end consumers and about 34 percent is the internal investment demand. To sum up: over 60 percent of the GDP and the growth sources is formed at the expense of internal sources. This is a cardinal change that occurred last year and it occurred on an even bigger scale at the beginning of the current year.
This is if you wish the slowing down of the economy by the end of the year, it is a "stand still" pause and it has to do with all kinds of tectonic shifts that occur inside the economy and, compared to sources of growth of the year 2000, it has a completely different basis and different roots.
As regards the growth of prices of services of natural monopolies, today the topic was also discussed. And we believe that in this year we have been able to find the acceptable compromise. Although the leaders of natural monopolies today say that the indexing is not quite sufficient to keep the given parameter of development, we believe that the trend that we have designated this year must be kept in the coming years.
Indeed, you put it absolutely correctly that we have the deadline in the month of May to present an analysis of the budgets of natural monopolies. We are actively dealing with this now. After this we shall be probably able to finally formulate the dynamic of the prices of the services of natural monopolies.
Today in the scenario conditions we, of course, used a certain dynamic. It is close to inflationary expectations, in line with the structural changes dictated by the energy strategy. But the final answer to the question must be provided by the research in question. Thank you.
Q: Finansovaya Rossiya.Can one say that the government's expectations with regard to the rate of growth of the GDP have somewhat diminished for the coming years, compared to the forecasts published last year. This is the first question and the second is: Don't you think that the Duma will simply have physical difficulty coping with a huge number of technical rules and procedures it is supposed to adopt and, on the other hand, it will not be able to discuss them in a competent way?
Gref: Regarding the rates of growth, I would say that the trend will fully remain the one incorporated in our forecasts in the year 2000 -- the rate is indeed being adjusted a little downward in some periods of time. And there are, of course, fluctuations, which is natural. In our short-term forecasts we always give a more or less accurate figure than in the medium-term forecasts. A medium-term forecast always has some slight errors.
Without a doubt, the rates of growth now are influenced -- and much less incidentally than we expected -- by the unfavorable foreign economic situation that developed over the past eight months. We see now a certain revival of the world economy. We were gladdened by reports that Europe, the euro area and the United States are registering a growth from the beginning of this year. You know that the United States has somewhat rectified their rate of growth -- instead of 1.3 percent tentatively for the fourth quarter, they have now published data about a 1.7 percent growth and we are gladdened by this because this will spur up or has already spurred up the price situation with regard to Russian export and, as a consequence, this will improve the financial conditions of the Russian enterprises, increase investment and business activity in the country and thus the rate of growth.
If the foreign economic conditions remained stable last year, we could get another plus 1 percent of the GDP growth. So, we lost one percent last year only because the foreign economic situation deteriorated compared to the one at the beginning.
Your second question concerning the adoption by the Duma of technical rules and procedures and the discussion by non-specialist deputies of these draft laws. Indeed, there is the danger that for quite a long time we shall be adopting a huge mass of the normative acts and today this concern was expressed at the government meeting. But the structure is as follows: until all the technical rules and procedures are adopted in accordance with laws, the old standards and technical conditions are bound to be applied, if they are obligatory in their nature. As to the recommendatory ones, those not related to life and health of citizens and environmental protection -- those will not work, while all the obligatory standards will continue to be applied.
So, regarding the discussion of these things by the non-specialist deputies, I would say that we have 450 deputies and they are not all specialists in tax legislation, medical legislation, conservation legislation and on and on. However, the parliament exists in all countries, and I am sure we should consider this as an element of public discussion and the adoption of such acts that directly restrict citizens' rights because every technical regulation imposes certain restrictions on business activities.
According to the Constitution, such restrictions of one's rights can be introduced only by law. And this is a key point. But when this issue is raised cumbersomely by an official in some agency, and I can say that often it is simply thought up, the top-level ministries and agencies which approve these technical norms do not even suspect what they are about. They are written by low-tier officials who then create a system of tributes from all businessmen who come to them for commission not to apply these very norms and standards. You know this as well as I do.
Q: I'd like to clarify one thing. It's about the old standards that will apply to safety issues. Will there be any acts specifying which norms concern safety and which not, and which are simply recommendations.
Gref: The law will only set forth criteria for determining which requirements are mandatory. It is not possible to divide physically them because then we would have to issue a huge number of documents. But experience shows that they can be quite easily divided into categories by using these criteria.
Q:A question about scenarios. The draft on the government's web site sets the price of oil at $18.5 per barrel which gives an average annual increase of 3.5 percent in the Gross Domestic Product. This scenario is called the most likely one. I understand that this draft was prepared a long time ago because it still refers to the March 15 OPEC summit in the future tense.
Looking today at the oil price trend, which of the two scenarios -- $21.5 or $18.5 per barrel -- you think is the most likely one?
Gref: First of all as you know, this document has to be submitted to the government not later than two weeks in advance. I think this one was submitted as early as March 14 and therefore was prepared even earlier.
As for our expectations they haven't changed much. If you have seen the terms of the scenarios, you must have seen our arguments. First, current fluctuations on the market, as all leading experts believe, are caused by two factors. First, an unstable situation and expectations connected with Iraq. Second, economic growth and dwindling reserves in the United States. We all hope of course that the world economy will continue to develop and grow, but the first factor cannot last forever and it will have to cease to exist at some point.
In this case, it will be hard to forecast oil price fluctuation because there may be very many different scenarios to consider. Speaking of medium-term perspectives, I would believe that the price of $18.5 per barrel is the most probable scenario. And we must proceed from this price, not higher, in planning our budget expenditures.
We already have the experience of this year and the idea of financial reserve that may be implemented in the future in order to accumulate certain funds to be spent if the foreign economic situation worsens.
Q: I have a question regarding technical regulation. Will there be regional laws on certification and standardization?
Gref: No, the Constitution makes this the exclusive prerogative of federal authorities.
Q: How will the problem of secrecy regarding weapons and other such things regulated in this law?
Gref: This law does not cover it. There will have to be a separate law.
Q: When this law is adopted, apparently the WTO will have no complaints about technical regulation procedures? Can we say this with confidence?
Gref: The problem is that the law is not adopted yet. It has only been given an overall approval and will have to be considered by the government again.
Q: But when it is adopted, apparently no complaints about technical regulation will remain. Can we say that?
Gref: Most of them will be resolved. We can say that.
Q: What text changes will be made for small business when the government considers this issue? And second, you said there are 60,000 standards in Russia. Do you have any figures for other countries?
Gref: I can only tell you how many mandatory standards we plan to leave in Russia. About 400-500.
Q: But how many standards do other countries have?
Gref: This issue depends on the country and its traditions, but speaking of mandatory technical regulation, it's about as many as I said.
Q: And the first question, taxation for small business.
Gref: As for taxation -- I understand that you have no more questions about today's topic -- the president said yesterday, and we fully agree with his assessments, that this is a key and even revolutionary bill for small business.
I must say that the bill that will be submitted to the government at its next meeting includes all the bold decisions, I think I can say that, which we planned to adopt in this sphere. In my view, we have succeeded to a large extent in achieving our key goals we set ourselves, and the president and the prime minister set for us to achieve after drafting this bill.
First, it's a radical simplification of taxation for small business, accounting and reporting procedures. Second, it's a radical reduction of the tax, of the overall tax burden for business. Third, it encourages employment and remuneration of people working in this sector. Fourth, it maintains the level of social production in this sector.
I believe the decision was rather complex, but the ministries that drafted this bill for the last six months -- the Ministry of Economic Development and Trade, the Finance Ministry and the Tax Ministry -- succeeded in finding solutions. They are as follows.
We propose two system of taxation: a simplified one and a temporary one. A simplified system of taxation allows entrepreneurs to choose which tax to pay, either the tax on revenues which will be 8 percent, if of course it is approved by the government and the State Duma, or the tax on profits, which is revenues less 20 percent expenditures.
In order to maintain the level of social protection, the law will set a certain level of payments to the Pension Fund, to the cumulative personal pension account. It will be 14 percent which can be deducted either from the overall sum of taxes or included in the non-taxable base. So the total burden will not be bigger than that.
The temporary system of taxation has changed considerably compared to what it was and what it is now. The rights of constituent regions and republics to manipulate different ratios and the overall tax burden have been reduced substantially. Now they will have only two key rights. First, they will be able either to introduce or not to introduce the temporary system of taxation, and second, play with the ratios to apply if the temporary system of taxation is introduced.
We believe this may make it much easier for small businesses to project and conduct their activities, and will reduce the overall tax burden. Our forecasts show that these measures may reduce the overall tax burden by about two and more times. I think that's all. There are many details which, I think, we will have time to talk about later, and I believe the next meeting of the government will have this issue at the top of its agenda. Thank you.
Moderator: Thank you.
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